Sun, Dec 14, 2003 - Page 9 News List

China's economy is rotting within

Rosy statistics cannot disguise the chronic mismanagement and the administrative ineptitude that threaten China's future

By Sushil Seth

There is no shortage of stories about China's economic growth. But the figures remain dodgy. In his statement to the US Senate Finance Committee on April 6, 2000, Nicholas Lardy, an expert on China's economy at the Brookings Institution, said: "The official data overstate the pace of economic expansion ... over the past decade there has been an extraordinary buildup of unsold and unsalable inventories."

He continued: "On average, [from] 1990 to 1998 annual additions to inventories in China absorbed 42 per cent of incremental output. While some increase in inventories is needed to support higher levels of output, the disproportionately large inventory buildup in China reflects the continued production of low-quality goods for which there is little or no demand."

This is reminiscent of the Soviet Union, where production targets were met irrespective of low consumer demand for shoddy goods.

Then there is the story of ever-increasing investment of foreign funds in China. This again is dubious. For instance, the amount of capital illicitly transferred overseas actually exceeded the amount of foreign investment in China in the year 2000.

The Yangcheng Evening News has also written: "On the one hand, the government is making big efforts to attract foreign investment. On the other hand, large amounts of capital are fleeing overseas. In the face of these facts, who wouldn't be heartbroken?"

At another level, China's non-performing bank loans are a major worry. According to credit rating agency Moody's, "the health of the state banks remains a central concern ... Chinese banks overall lent more in the first seven months" of this year than in all of the previous year.

The transfer of some non-performing loans -- about US$170 billion in 1999 and early 2000 -- to asset management companies has not resolved the problem because the companies are not able to sell the loans even with big discounts.

The government tends to squander its people's hard earned savings, deposited mostly with state banks. Writing in the New York Review of Books in 1998, Liu Binyan and Perry Link said that "as of early 1997, almost half of the money in personal savings accounts [two trillion yuan, or US$240 billion] had been lost" in bad loans. Things do not seem to have changed much since then.

There isn't much hope that things will get any better because of the systemic corruption that exists. The rot starts at the top. As He Qinglian pointed out in her book, China's Pitfall, the urban economic boom in the 1990s amounted to "a process in which power-holders and their hangers-on plundered economic wealth."

She added, "The primary target of their plunder was state property that had been accumulated from 40 years of the people's sweat, and their primary means of plunder was political power."

The link between power holders and China's new robber-baron class spawned by them is still strong.

According to journalist Julie Chao, "Graft is endemic in China, where personal relationships still count more than rule of law. Anything is for sale, from police complicity in smuggling rackets to acquiring land, where buyers can kick off the farmers and build a golf course or hotel or office building."

And she quotes economist Hu Angang's estimate that over the past decade corruption has cost China the equivalent of roughly 15 percent of its GDP annually in lost taxes, tariffs and skimming of public funds.

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